Revenue and People Count

Look at the quarterly or annual revenue reports of offshore based IT services companies and almost all report revenues and employee count hand in hand. The unsaid association is that more the number of employees, greater the revenue. So, you read projections each year of each company targeting to hire in the upwards of 20,000 or even 30,000 or 40,000 employees each year!!!!

An interesting study would be the comparison of revenue per employee of these firms with that of their competitors who are primarily pure services non-offshore headquartered or services companies with OEM business as well. And if we want to spread the spectrum and skew the numbers further, we can include the same for software product majors. Will make for an interesting weekend study which I will do one of these days. But the relationship drawn makes one wonder where this will stop. For a $6b-$8b revenue if the employee base needs to be upwards of 150,000 employees, what happens when the firm is say $20b if there is always a linear relationship which has happened till now and firms don't seem to be talking of more value based revenue. What worked well in the past will not necessarily work in the future. As the employee base grows, focus on managing the gigantic resource pool and its aspirations will be crucial.

"Yes Sir" and No "No Sir"

I was having a lunch conversation with a colleague who has moved from the IT department of an enterprise to an offshore based service provider's organization. He was sharing his frustration on the lack of assertiveness on the part of most team members in the offshore service provider's team (and in that company in general). Since he had moved from an internal IT organization to a service provider, these were frustrating for him when he was in calls with the client where his colleagues mutely accepted whatever the client asked for --- be it additional scope of work, very aggressive timeline commitments or unrealistic service expectations. They just didn't push back!!!

This is in fact a recurring sentiment I have heard from many on both sides of the table -- those who offshore work to IT service providers and those who provide such services working for offshore based IT service providers. This is in fact a very rampant behavior trait which neither party wants to discuss because one is taking advantage of it and the other is being taken advantage of. Worst, most often the team members don't even realize that there is an option to push back. I am not suggesting that the trait should be a "push back all the time and every where" attitude but there are ways to respectfully and collaboratively correct a client's expectation if they are unrealistic or may have issues which they may not be aware of. Most folks in several offshore based companies just do not acknowledge this and this seems to run through the echelons of power in such companies. I have heard of some companies where the relationship manager says " How can I say NO when the customer is asking for it? He is the after all the CUSTOMER!" for situations where what the customer is asking is just not do-able or practical. What is not understood is that in the process incorrect expectations are set and face-off is deferred to a later time when anyway the expectations will not be met or lead to consequences which are not desirable.

Now, the interesting part --- though most customers who offshore take advantage of this cultural trait ( we will delve more on how much of it cultural and how much of it is anything else), in private they acknowledge that they want partners who can challenge them and say NO when the right answer is NO. They do not want to get a submissive YES for everything because then the service provider team is not bringing value in validating what they think. If, whatever the customer think prevails, there is no check or balance to bring in perspective from similar experiences with other customers. Not just that, many even say that they actually would respect an offshore provider more if they see the teams more balanced and responsive and say NO when that is the right answer.

What is the reason for this seemingly foolhardy behavior?:

1. There is a bit of a cultural aspect to this given that such conversations happen across cultures. While at one end are customers from the western world ( mostly Americas and Europe ... and I don't want to get into which ones from these two are more aggressive!) who are more aggressive in general, at the other end is a typical Indian or some times even attributed as an Asian trait of not confronting the client directly in business situations.
2. Another reason and more plausible is also that it just is not there in the DNA of such offshore based IT services companies because they essentially grew through T&M (Time & Material) contracts contributing almost 96% of all their revenues in the last 20-25 years. In a T&M contract, the resources from the service provider works as part of the staff of a manager who is from the customer's side. So, they are essentially executing tasks assigned to them. There is little chance to be asked for opinion in that sense and whatever opportunities exist are not leveraged due to the cultural trait discussed earlier. So, over the years, the organizations have grown on a staple of T&M engagements where their staff has followed what was assigned to them not having much of a chance (or inclination) to speak up to do things differently.
3. Another reason for I have seen is the "Customer is always right" syndrome which is conveniently used as it means whatever the customers asks or says is to be followed and takes away the "burden" of finding what is better or right if that is not known.
4. Another reason, which is again highly debate-able and needs to be understood in the right context has to do with the evolution of most of the offshore based IT service providers. In the early years of their formation, the staff they mostly used were from their base countries. However the IT maturity in these base countries was not to the level of what existed in most of the western world where the customers were located. Hence, while the staff started working, they were mostly on a learning curve for some of the technologies as these were new to them. Hence, in those early years, they also lacked the confidence of knowing that they could have a point to make since they knew that the client teams had worked in these systems for a longer time in the past than them and hence they found it more convenient to follow what was being told due to lack of confidence.
5. Finally, many organizations just do not understand still of what the customer is looking for. They think that by agreeing to what the customer is asking or suggesting, they are making the customer happy and ensuring continued business.
   

However this today is not limited to traditional offshore headquartered IT services companies. Since many of the employees in the offshore units of onshore headquartered IT services companies have been hired from the offshore headquartered companies, they carry these personal traits too with them in their new organization. This has further contributed to their own challenges in meeting expectations at times in their new organization or at times led to further rifting of the great divide that exists in such companies between their offshore units and their base home units set up onshore in the Americas or Europe. That rift is probably a topic for another post though!

But before I conclude this post, I should say that these are typical traits heard from many people on both sides of the story. This however does not mean that all offshore based IT service providers or all the team members of a particular service provider demonstrate this trait. There are many who are highly appreciated and their clients will tell you how they brought value by brining in perspective that were really brilliant. However, for those who found these traits, the above is an analysis on why it possibly happens given that such a behavior does not help either party in the long run.

Lack Of Product Focus in Indian IT Companies

While so much is written and read about the IT industry in India, two areas stand out and are conspicuous by their absence in all these discussions. And it is not surprising that these are two areas which otherwise in other parts of the world are in many ways the essence of IT industry. These are:

- The hardware industry

- The software product industry

While it may be incorrect to say that these two sub categories do not exist, fact is that these are hardly mentioned, known or existing the form to be reckoned with globally.

While India has made great strides in the space of IT services, the IT product area has not been something that can be written much about. While there have been hardware products designed to some extent, and there is ample cheap labor ( which can be seen in non IT manufacturing growth), core product design has not progressed much. It requires a different kind of rigor which the IT industry is yet to imbibe. Curiously the same IT services companies are working with leading global IT product companies to help in their IT.

Maturity and leadership in IT technologies will get a big boost when IT products are designed, planned and manufactured in India. This is true of several other economies where this can be seen and India should surely be on this track.

Satyam Computer Services : An Acquisition Candidate?

While a lot has been written recently on the developments at Satyam Computer Services in the recent week, clearly with the directors resigning including the high profile Vinod Dham, it has impacted their image. The recent World Bank issue which reportedly banned any business withthem for few years did not help any further either. There is more news tumbling on the nature of holdings by the promoter but this post is not about these developments really, but their possible impact in terms of a possible acquisition.s

So, is Satyam a good candidate for acquisition by either traditional onshore providers (like IBM) or even offshore players (like Infosys or TCS)? It may not be as easy, even when the time comes after the next quarterly announcements which is expected to clear their holding and cash reserve position. Here are some considerations:

1. It is too big with over 50,000 employees for a simpler acquisition assessment
2. It has been aggressive with its pricing, often taking on business with lower margins which may not fit every company's norms
3. It has a very negative image currently with possisble impact on future earning potential which does not strengthen a case for letting it exist as a separate entity after the acquisition
4. It would not bring any differentiator to at least the offshore based providers, except access to a resource pool of their employees and the existing customer base. No major technology or service differntiator would be involved.
5. For onsite based providers, most who wanted an India story have a big India presence already (IBM has over 70,000 employees) and so it may at least appeal to a major onshore based provider which was left behind in building an India story. This probably would be from a European provider as most US based onshore providers already have a big India presence.
6. While always counted among the top 5 of offshore based players, it was probably the one without a professional management team, when looked at by outsiders. There are others also in the Top 5 who are also led by the founder or his family but with all other factors inclcuded Satyam stood out in that count.
7. The current economic climate does not motivate many to look at Satyam for an acquisition in an all-cash kind of deal.
8. There has been a start of exodus and poaching of some of their brighter employees which will only worsen with time, if a promising suitor doesn't move quickly
9. Satyam has played in most segments but does not lead in many and by too much. The best areas known as its SAP practice and to some extent its engineering services practice.
10. The promoters have caused damage with the news trickling and their other interests (in real estate etc.) to make any new company do a thorough scrutiny of its books before deciding on it.

Surely a story to keep tab on in the coming weeks.